Increasingly we hear from our clients about threats issued by their bank. These threats have in some cases forced our clients to agree to sign up to new Personal Guarantees significantly increasing their exposure. In other cases the threats have forced clients to renegotiate loan agreements which were not in default and had many years to run.
Often we hear from clients phrases such as “they said they were going to pull the house of cards down” or “the bank told me if I did not agree chaos would ensue”. The pressure on the client in these cases is immense. But is it legal?
Traditionally the courts have taken no account of this kind of economic pressure. If they were being asked to set aside a contract, the courts only recognised behaviour that amounted to extortion. So if the person signed the contract under extreme pressure – pressure so extreme that the person signing never really consented at all – then the courts would be prepared to set aside the new contract. But physical threats of violence were required and anything less than this would not do. Historically economic pressure, and threat of financial ruin, was not enough; reluctant consent was still consent.
However, a series of English cases started to look at this a little differently. In a landmark case in the House of Lords the judges found that one party’s apparent consent was induced by pressure exerted on him by the other party. They decided this pressure was illegitimate and the contract should be set aside.
After this a number of cases followed in which the English courts decided that “illegitimate economic pressure” had taken place, forcing one party to contract with another. One of the main deciding factors for the courts was whether the practical effect of the pressure had meant that the victim had no realistic practical alternative. In one case the victims were quoted as saying “you’ve got me over a barrel”. Another factor the courts looked at was whether the behaviour of the pressuring party could be described as “thoroughly unreasonable” – as distinguished from the rough and tumble of normal commercial bargaining.
Although the idea of illegitimate economic pressure is part of the law of England, it has not really been tested in Scotland yet. But increasing numbers of our clients have been describing to us how their bank has threatened to close down businesses – sometimes unrelated businesses connected only by the identity of the directors; to manufacture an event of default to force the client to renegotiate a loan because the interest rate is lower than the bank would like; or to bankrupt individuals by calling in personal guarantees.
We think the illegitimate economic pressure argument may just be the tool they need to force the bank to rethink their approach. It may be time to present this argument to court and ask the courts to recognise this as part of the law of Scotland.
Has this happened to you? Let me know.
For further information please contact Cat MacLean on 0131 226 8218 or email firstname.lastname@example.org